Table of Contents

PSYCHOLOGICAL TRAITS OF A SUCCESSFUL STOCK INVESTOR ................................................................... 2

[1] Fundamental Analysis to Reach Your Investment Goals ......................................................................... 6
[2] Stock Selection Criteria | Safe Large Cap Stocks ................................................................................... 10
[3] Best stocks to buy 3 things to look at when buying a stock ............................................................... 12
[4] Should you buy more to average share price if it goes down? ............................................................. 15
[5] A Simple Rule to Calculate Fair Value of Stock ...................................................................................... 17
[6] Picking Value Stocks My Best Stock Purchase Decision...................................................................... 20
[7] Why Value Investing Does Not Work Anymore..................................................................................... 22
[8] How to Select the Best Stock to Buy ..................................................................................................... 25
[9] Nifty PE Ratio as an Indicator of Stock Market Valuation ..................................................................... 29
[10] How to Prepare For the Next Stock Market Crash? ............................................................................ 33
Art of Investing Course............................................................................................................................... 38

Psychological Traits of a Successful Stock Investor

The Successful Stock Investor
Imagine a world where everyone was equally intelligent, with identical psychological traits and
access to the same information. What purpose would the stock markets serve then?
Ill answer that None.
The business of stock Investing thrives on these 3 things Intelligence, Psychology and Information.
After closely observing many successful stock investors, I have realized that having only one of
these traits could actually do a lot more harm to your portfolio than you can imagine. You need at
least two of the above traits to formulate your style of making money in the markets. Of course, if
you manage to master all three, then I see no reason why you could not be the next ________ (fill in
the name of who you think has been the most successful stock investor of all times).
Nevertheless, of these, Intelligence I believe is the easiest to acquire and you dont need more than
what it takes to do basic numbers and read indexed content. Information is purely incidental to
ones closeness and familiarities with those who may be better placed or better aware of certain
realities. By all means, you should try to spend more time with such people. In contrast, human
psychology is something which is hard to adjust to a desired state of being. Those who are able to
discipline their minds need to do little more to succeed in stocks, as indeed in life. Again something
I learnt by years of digging deep into the way of being of those who have been successful at making
money in stocks.
Later in the course you will read many things about financial ratios, value, fundamentals and
what not. Understanding those concepts will help you make good investments and avoiding the
bad ones. Let me state upfront, all that knowledge put together will not stand a chance against
psychological traits like greed, envy, fear etc.
You will buy stocks because everyone is buying them and sell them for the same reason. You will
often look at a friend who made a fortune in the stock markets and envy him. Oftentimes, you
will start buying and selling based on how that friend does things in future. Each of which could
have tragic consequences. No matter how much I try to convince you of this, there is all likelihood
that you will commit these very mistakes in future. Please dont!

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Dont believe me? Lets conduct an experiment.

People often ask me about my investment rationale. I find
it difficult to answer this question. Mostly because I try to
come up with a better answer every time, while knowing
full well how ridiculously difficult it is to come up with an
inspiring answer to that question. Depending on how much
time the inquirer has I could nevertheless come up with a
very lengthy answer I research; I look for well managed
companies; I look for strong financials; I look for
businesses which are likely to grow in future; all of the
above. Repeat using different terminology and all of the
above again.
Basically, write it in a million different ways. I have seen many successful stock investors who
write a well defined investment rationale ranging from half a page to a few pages. I like reading
them all but I never strictly follow one of my own. This is because, besides these basics which are
absolutely essential to me, I am myself not sure about what may get my attention. If I find a young
company operating in a niche growing market of course I will research further. Just that, how many
such situations may get me excited is hard to write down. Besides, its futile for I cant cover for
every possible situation which may merit further investigation.
Now then, I have always bought and sold (mostly bought) shares based on my estimation of future
growth. Like every single investor, my estimations have been right and wrong. The fact that I have
managed to consistently grow my portfolio, despite operating in the slowest years (2008-2013) of
stock markets, has assured me that it may not be too ambitious of me to aim for higher returns in
future.
I often look back at my stock picks to evaluate my decisions after passage of some time (never more
frequently than 3 months unless something screamingly irregular happens). Every time I do that
exercise, I realize how picky I am with most of my investable fund, about 60% of which at any given
point is allocated towards long term investing (with at least a 3-5 year time horizon in mind).
In all, I have made 5 big share purchase decisions over the last 6 years. When the markets crashed in
2008-09, I invested a lot of my money in Yes Bank share, which was still a young and upcoming
bank back then. I bought it at Rs. 77 for a share in April of 2009 and sold my entire holding at Rs.
449 in December of 2012. I bought United Spirits share at Rs. 883 in late 2011 (after which it
declined to below Rs. 500). I am still strongly holding on to my entire holding. Just at the beginning
of 2013, I purchased a lesser known company, First source Solutions, when it was trading below Rs.
10. I am still holding on to it with conviction.
At the same time, I did not buy an ITC when it traded at Rs. 194, in late 2012, despite many hours of
debate with those who racked up on it. For those who have followed my research and writings will
see how much research and experimentation has been put out on ITC stock and yet I did not buy it.

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Our website is embarrassingly filled with ITC examples, search for DCF sana, or BCG matrix sana on
Google and you will find that its all performed using ITC financials. The research then is a proof of
how close I got to buying it.
ITC stock has nearly doubled since then.
Anyways, if you are in doubt, avoid it, and thats what I did. There are always opportunities in the
market which beat the previous growth records of some of the finest companies. Just yesterday,
after months of research I decided to invest in a company which I sincerely believe could give me
multiple returns over the next few years. My research lasted over a month during which time the
stock moved in a 30-40% range. Yesterday when I bought it, the stock was almost 22% higher than
where it was when I started looking at it. I am confident that this is just the beginning.
You dont have to answer this to anyone but yourself Are you already convinced that this
company has great financials?
Was my story of riches in stocks (which you may never be able to verify), at least worthy enough so
as to create curiosity to know more about this company, so perhaps you can research further?
Really?
Would you have been more curious, had a well sought after market expert on prime time television
told you about that company? Or may be that friend of yours who made a fortune in stocks ? Over
and over again, random companies with poor financials backed by the blue eyed boy of TV news
get purchased. Tragically, they often get researched before getting purchased. But again, with some
nice talk to go with it, you may find a good enough reason to believe that the blue eyed boy is the
most successful stock investor of the present day.
Amongst the many psychological traits which have an impact on your subconscious mind, the two
strongest ones are (i) Overreaction and herding; and (ii) Overconfidence.
Overreaction and Herding: People tend to overreact to both good and bad news. For Example: if
the quarterly results of a company are not good, a typical investor response is to sell his holdings
even before understanding the reason(s) for the bad results. This has a disproportionately negative
effect on stock prices. Similarly, a small incentive from the government to a particular industry or
sector often results in fanatic buying of shares, of companies operating in that industry.
Investors also tend to imitate each other. Whether prices are moving up or down, they fear that
others know more or have more information which makes them do what others are doing. This has
traditionally been the most mindless, yet the most commonly performed act in the stock market (in
my experience, this trait extends beyond stocks). These days everyone seems to be buying houses.
Buying any land whether commercial, residential or some sort of a hybrid mix of the two, all seems
to be in vogue. Often in localities where prices have consistently run up over the last 10 years or
more. But again, I guess consistency fuels overreaction and herding.
Interestingly, using the skills of basic observation, I realized that those who are convinced that
property prices will keep raising (may be because of an ever increasing population of the planet or
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for any other similar reason), are also the ones who firmly believe that so many investors and real
estate advisers cant (collectively) be wrong. I guess its about getting solace in the company of
other distinguished thinkers. I dont want to alarm anyone and I hope I do not sound stupid when I
draw your attention to one of my all time favorite reads the very first law of Human Stupidity put
forward by Carlo M. Cipolla:
Always and inevitably everyone underestimates the number of stupid individuals in circulation.
For more on this research you could search for Cipollas laws on human stupidity.
Note: I express no views on investing in real estate as an asset class. I am not trained on the matter,
nor involved in the subject. The commentary is meant only to explain the psychological trait of
overreaction and herding.
Overconfidence: In general, people like to think that they know more than others which makes
them overrate their own abilities. Overconfident investors not only make careless decisions for
themselves but they also influence other market participants by their decisions. As the price of a
stock recently purchased by an investor rises dramatically, it will form an opinion in his mind that
his judgment is correct, making him believe in his expertise. As the price moves up further, the
same investor starts believing in his abilities more than ever. This overconfidence often results in
further mindless buying.
I read the best illustration on the subject in Nassim Talebs classic book, Fooled by Randomness.
A group of people participated in a contest of flipping coins and predicting the side on which the
coin would land. Each contestant would play against the other in rounds of elimination until they
reached a winner. After a few rounds when only some contestants remained (who of course had
been successful in predicting the landing of the coin on all previous occasions), they were
interviewed and asked how they managed to be successful each time. Many of them answered that
they had mastered the technique of flipping coins. Of course, the probability of the coin landing on
either side remained an exact 50%, in each case.
Many other psychological biases could influence your thinking and decision making, greed and fear
being the other common ones. The list could be endless and it may not help to read a long list of
biases to try and change your personality. It takes immense control and self discipline to hold on to
your conviction, especially when people around you are making a lot more money based on theirs.
If you have done your research right, stop looking around to see how much money is being made or
lost, just hold on to your stocks and you will make a lot of money.
Remember, the nature of investing is such that those who rightly forecast before others are
rewarded the most. One of the traits of a successful stock investor is that he strongly holds on to his
conviction even when he finds himself in rare company.

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[1] Fundamental Analysis to Reach Your Investment Goals

I am sure that many of you have heard about Fundamental Analysis, or fundamental view in the
context of stock picking.
Sometime back, I released a video explaining the concept of Investment Fundamental
Analysis where I spoke about financial facts and qualitative opinions and concluded that The
standing of an enterprise is in part a matter of FACTS and in part a matter of OPINION.
Something more basic than that which I did not discuss was the importance of defining the word
INVESTMENT well for yourself. Different people have different definitions for the word
investment. And why not? Investment could mean different things to different people. When you
invest in a business or a new venture, your intention is to make a high rate of return on your
investment, so thats money well invested. In the financial world (the context in which I am writing
this article) investment typically refers to investments made in stocks, bonds, bullion and other
financial products.
No matter what your approach and where you invest, in all cases the idea is to earn a good rate of
return on your investment. You hope that in future, the principal that you invest today
(i.e. investment = principal) will grow. Unless you have a clear idea of your investment goals, you are
very likely to do harm to your principal in the financial world.
If you are serious about long term investing, you will benefit immensely from this definition:
An investment operation in one which, upon thorough analysis, promises safety of principal
and a satisfactory return. Operations not meeting these requirements are speculative. Graham & Dodd (Security Analysis 1st Edition 1934)
If you focus on the highlighted words, you will see that investment is defined as an operation, in
the sense that it requires detailed analysis and research as opposed to buying something which a
friend or a stock broker feels will do well in future. If you are not researching and analysis yourself,
you are not investing, you are either speculating or just gambling. Now I am not saying that either of
that is a bad idea. In fact, personally, I know some very well informed and sophisticated speculators
who have made a lot of money by predicting and anticipating future events.
What differentiate speculation from investing is detailed research and the power of knowledge. So
unless you research and manage your risks well you are doing anything but not investing.
Now focus on the other highlighted word Satisfactory return. This is subjective. You have to ask
yourself What kind of returns are you looking to make and must keep in mind that investment is
all about risk-reward. Higher the risk, great the reward. Of course, if you are looking to make 35X in
under 3 minutes, then you should be in a country which allows casino roulette. Needless to say that
you may find the subject of fundamental analysis a little far from reality. At the same time, if you are
happy making 7-8% return per annum then you should get to the closest bank and enquire about

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the available fixed income schemes but remember, nobody they say ever became a millionaire by
investing in fixed deposits.
So who should be interested in Investment fundamental analysis?
If you are someone who is willing to take educated risk to make high returns, you may find the
stock markets an extremely rewarding place.
How do you start?
Once you learn how to start investing in stocks, you will find that there are 2 approaches to study
the stock markets The Top Down Approach and The Bottom Up Approach.

In top down approach, the idea is to analyze the state of the economy as a whole by looking at
variables like the GDP, interest rates, unemployment and industrial production figures etc. Once you
are convinced that the economy is not overheated and is not showing any signs of slowing down, you
come to step 2 i.e. Industry analysis; wherein you try to ascertain particular sectors or industries
which are likely to do well in a given economic environment. For example, if you are convinced that
future economic policies will provide a big boost to the education sector in India, you will look at
companies in the education sector, if you think that the interest rates are going to come down in
future, you will look at the banking sector. Once you ascertain the sectors which are likely to do well,
you finally start looking at various companies in those sectors. By contrast, in bottom up analysis you
start by looking at the business of the individual company. You choose stocks based on individual
valuations and growth potentials of the company instead of looking at the state of the economy or the
sector in which the company operates.
Which of the 2 approaches is better?
It is not easy to answer this question. In different economic cycles, different approaches work well. If
you follow too much of the top down approach, you might miss out on buying companies which are
operating in sectors which are temporarily not doing well because of a bad economy, or due to
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some industry specific problems. On the other hand, if you pay too much emphasis on the bottom
up approach, you may end up with stocks in companies which underperform despite their strong
fundamentals, on account of problems in the broader economy or the specific industry in which
they operate.
I can safely say that where we are right now (in 2013), the bottom up approach (i.e. the approach
followed by value investors) will do well because the economy overall is trying to recover from a
slowdown. However, you should never ignore the overall economy. Mostly because, unless the
overall investment and business climate is good, stocks as an asset class do not perform well
irrespective of the individual merits of a company.
Of course, it is extremely difficult to predict economic cycles. Think about it, if it were easy to
predict economic cycles, the 2008 crisis may never have happened. Nevertheless, those who
manage to predict them often find a dedicated Wikipedia page for themselves and become the
darlings of financial media.
Certainly, I dont mean that you should be blind to the overall economic environment. One easy way
to assess the economy in the context of stock investing is to look at the long term trend of the
market. (Please note that I dont mean for this to sound like technical analysis or chart analysis).
When I say trend, I mean the relative valuation of the stock market over a 10-15 year period. Any
such chart will highlight an enduring lesson of investment history The fact that markets move in
cycles of recession, recovery and boom!
For example, look at the chart below:

It shows the average price earnings of the Bombay Stock Exchange for the last 20 years. It
does not take much beyond a brief look at the chart to understand that we are currently trading
below the average PE for both the last 10 and 20 years (current Sensex PE = 17.8). So the broader
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economy itself gives you indication about the investing environment. Interestingly, evidence
suggests that the pace of investment picks up once the black worm climbs over the average PE and
remains sluggish when its below that average. Why that happens may well be discussed in an
article on human psychology.
Click Here to read Economy vs. Industry Cycles: How do you research for the right industry
sectors?

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[2] Stock Selection Criteria | Safe Large Cap Stocks

In one of my post I highlighted how even in the worst economic environment, well established
and safe large cap stocks tend to perform well. It is in fact true that if one were to blindly buy any
5 out of the top ten stocks (by market capitalization) and hold on to them for a few years, he will not
only beat the market, but also the performance of most mutual funds. There is ample evidence to
certify this. Read the post here
In this post, I will talk about the stock selection criteria to shortlist from amongst the list of safe
large cap stocks.
NOTE: this may be relevant for investors who want their
principal investment to be deployed at low risk and seek
appreciation in investment value over a period of time.
Nevertheless, the exercise of filtering from the universe of
large-caps helps ensure that you do not end up buying good
companies when they are overpriced. The intention as always
buy good companies at great prices.
Stock Selection Criteria
For blue chip investing, follow the 6 step stock selection criteria presented below:
[I] Price / Earnings Ratio A good starting point will be to look for companies which are
available at 10% discount to their industry PE ratios. Keep in mind that companies in some sectors
will enjoy a high PE ratio in comparison to companies in other sectors. A more detailed discussion
on this can be found here Price Earnings Ratio.
[II] Average 10 years Return on Equity (ROE) in excess of 18% - ROE indicates the amount
of profit which the company generates on the capital invested by the equity shareholders (i.e.
shareholder return). A company must at the least generate a double digit ROE. Established blue
chip stocks in India typically generate average ROE in excess of 15%. Keep in mind that certain
companies with low equity base may report extremely high ROEs and one must look for the
reasons for a high (or low) ROE. What is most important is to look at the trend in ROE (i.e. is it rising
or falling and whether the company will be able to sustain a rising ROE going forward).
To explain this point with an extreme example, look at Colgate Palmolive, it has been reporting an
ROE in excess of 100% for the last few years. ROE in such a case may not present a complete
picture. Behind Colgates high ROE. Colgate has only 13.6 Cr shares outstanding. Lets say an
investor was to buy 1% of it = 13,60,000 shares. The Investor will pay Rs. 176.8 Cr to get 1% equity
(assuming the current share price of Colgate = Rs. 1300).
For Rs. 176.8 Cr, the investor becomes entitled to 1% of annual ROE = 5 Cr (i.e. FY 2013, PAT was
Rs. 496 Cr). Effectively this means that if this company (Colgate) continues to generate an ROE of
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100%, it will take a little over 35 years to earn Rs. 176.8 Cr on 1% equity. This is just what the PE
Ratio also indicates (i.e. Colgates PE Ratio = 34)
[III] Competitive advantages Focus on companies that enjoy competitive advantages which in
turn will help them in protecting their market share in the long term. A number of such competitive
advantages (i.e. economic moats) help these well established companies in sustaining their
dominant market position. For example, in case of Colgate, the companys large market share, gives
it a huge pricing advantage (i.e. it could temporarily lower the prices of its products to thwart any
new entrant in the market). Having strong economic moats is one of the most important stock
selection criteria for any serious value investor.
[IV] Future Prospects This is an area of research, where there is no substitute of hard work.
These days, Google can help you a great deal in finding all the relevant information about the
company. However, keep in mind that Google cannot separate sponsored content from the genuine
and you must be careful with your research. That said, it is not difficult to do a SWOT analysis of a
company and list down your findings.
Those who follow my writings will know how much emphasis I give to the quality of management
and on the role of corporate governance in investing. In case of Blue Chip investing however, you
could focus more on market developments than on who runs the company. Unlike, small and mid
cap companies, blue chips have withstood the test of time and their managers are being tracked by
a large number of analysts. With that kind of scrutiny, this is one area where you could cut your
work short. On the contrary, your focus should be on finding such strong businesses that managers
should have little to do in running them successfully. To go back to my example of Colgate, I am in
no doubt that the share price will be affected more by the impact of Procter and Gambles entry in
the Indian toothpaste market and less by who succeeds the current CEO of Colgate.Buy into a
business thats doing so well, an idiot could run it, because sooner or later, one will. Warren
Buffet.
[V] Dividend Record Large, well established companies typically have a huge pile of
accumulated reserves. While it is important to have healthy reserves for future expansion and
contingencies, dividend payments indicate the profitable nature of the company and a positive
management outlook.
Once the business of a company matures, and in the absence of any realistic expansion plans for
future, the management of a well established company returns a large portion of the profit it
generates to the shareholders as dividends. Uninterrupted and growing dividend payments are a
hallmark of blue chip investing. A dividend yield upwards of 2.5%, coupled with rising
profitability is a strong indication that the company will raise the dividends going forward.
[VI] High (institutional) Investor base - A large investor base and particularly institutional
holding not only assures liquidity in the stock, but is also a seal of approval from experienced
investors on the quality and strength of the stock.
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[3] Best stocks to buy 3 things to look at when buying a stock

If I could make a list of the best stocks to buy in any market environment and such list was
approved by everyone whoever buys a share, then very soon, that list will become a list of stocks to
avoid or the worst stocks to buy. What exactly does that mean?
If you put on a finance news channel, you will see that analysts have different views on the same
stock. It is neither rare, nor wrong to get conflicting views on the same stock:
6 May 2014; 2.25 PM Sell Tata Motors @ Rs. 390 XYZ Analyst
6 May 2014; 2.27 PM Buy Tata Motors @Rs. 390 ABC Analyst
Is this wrong or should you question the logic of the news channel. Absolutely not!
If at all the contest is between XYZ and ABC where the future price action will decide a winner.
Think about it, for every seller there must be a buyer; else the trade wont go through. So every time
you sell a stock at a given price, REMEMBER there is someone happy to buy that stock at that
price. In the above scenario, XYZ feels Rs. 390 is too much for a Tata Motor share (at least at the
given point of time). ABC has different views. Result a successful trade.
Coming back to the point, if we had a universally accepted list of stocks, the market place will be
filled with buyers. In the absence of any sellers, how long will the buying be sustainable? Imagine
no sellers for the Tata Motors Stock. Would there be sellers if the offer price per share touches Rs.
10,000?
Short point There is never a universally accepted list of best stocks to buy at any given time.
Things change with change in business plans, management, and industry outlook and of course
the stock price.

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Best Stocks to Buy: Focus on the Points Below

[I]

Do you understand the business?

I am not going to repeat everything what Buffet ever said but understanding businesses goes
beyond what appears on surface. Focus on finding out revenue streams and expense streams, the
rest will follow. How does the company make money and how does it spend it? Remember, the
words of McDonalds CFO We are not basically in the food business. We are in the real estate
business.
I remember when I was young; I used to watch the World Wrestling Federation (WWF). I thought it
was about strong men who win belts and trophies based on brute power. As I grew up, I figured
that it was like a soap opera in a simulated fight environment. I lost all respect for Hulk Hogan.
Dont get fooled. Understand the real business.
[II]

Who runs the business?

I was not entirely sure, if this should have been point no.1 or 2. Unless the management cares for
shareholder value, you are unlikely to benefit from even the most lucrative business. These days it
is easy to find out a lot about the management on the internet. Read about the management on their
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website. Look for what shows up when you Google search their name. Try to find out about their
professional and business history. Search their name on CIBILs website.
Here again, look beyond those who appear to be running the business, look beyond the CEOs
and the CFOs. Especially in India, look at the majority stakeholders and check their records.
A few years back I wrote a piece on the role of corporate governance and what to look for when
assessing management quality. The best stocks to buy under any market environment are the ones
in companies which are run by honest and efficient managements.
[III]

Does the stock offer value?

Thousands of man hours are spent every month at research firms across the world. Their goal buy
stocks that offer the highest value.
While there could be many approaches to assess the value of a stock, like the cash flow (or DCF)
analysis or just looking at the current price to earnings ratio, in an ideal scenario, you should be
using different approaches for different industries.
Even when you use the most basic PE method to asses a rough value, companies in certain
industries will report a higher price to earnings figure in comparison to companies in other
industries. For example, technology and FMCG companies command higher PE ratios since it is
believed that their earnings (and accordingly the EPS) grow at a faster pace.
What is more important is to benchmark companies within the same industry and measure their
performance against each other and then make an assessment if the price is justified given
everything else that is going for and against the stock.
Here again, as a pure value investor, one may be looking to buy fundamentally strong undervalued
stocks with a proven track record. At the same time, those who look beyond the sphere of value
investing may also like t0 factor in/ look more towards future growth potential. For a
differentiation criteria on these parameters refer to this post on blue chip and growth stocks.
This by no means is a comprehensive checklist of things to do before making a stock purchase
decision. On the contrary, if at all, this post should be taken as a point of reference when you start
getting interested in a particular stock. Also go through the recommended posts below to get some
more perspective on selecting the best stocks to buy.

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[4] Should you buy more to average share price if it goes down?
We all do it, or at least have done it at some point of time or the other.
Average share price Average your buying price by purchasing more shares at a price lower than
your original purchase price.
In an ideal world, you should of course be buying stocks where you see value. In other words, if you
believe that a stock will rise from a certain level and for whatever reason it is in an oversold
territory, you will / should buy it.
Naturally then, when it falls below your original purchase price, you have every reason to believe
that you should average share price so long as your original purchase decision was correct.
Rule of Averaging Your Purchase Price
If nothing has changed for the companys fundamentals since your original purchase decision, you
should buy more and average at 10 15 20% lower price or at whatever lower threshold you are
comfortable at buying. Of course, the economy, industry and the overall sentiment of the market
should also be broadly the same as before to justify such purchase decision.
For most part the above statement may be true but I recently got a question from a subscriber, the
answer to which would probably throw more light on this aspect.
Exception: When Should You Not Average

Idea: Buy on green & try to average share price on red?

This morning I got a mail from a subscriber which is mostly why I thought of writing this piece. I
will reproduce our interaction below:

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Question:
How much downside is still left with ORBIT CORP?
Its almost 30% down from your Multibagger pick BUY price. Should I do Cost Averaging at current
price of around rs17.50 with Equal Investment Amount as done at price of Rs. 24?
Or should I wait for further downfall??
My Answer:
Why do you want to average it?
As I understand, you purchased Orbit Corp at Rs. 24. Now this is a little speculative in that if their
business and the real estate market in Mumbai revive, then this could trade substantially higher.
Lets for a moment assume this happens. The share trades at Rs. 150 in the year 2018. Then do you
care if it was at Rs. 24 or Rs. 14 or Rs. 18 when you bought it?
On the other hand, if the business and/ or industry do not revive, you may find this share trading
below Rs. 10. Would you not feel odd about averaging between 17 and 24?
I would say, stop looking at your purchase at Rs. 24, its a good buying price given therisk-reward.
Focus on blue chips too, you know ITC, Cairn India, L&T etc.
Now again, if you have a lot of speculative money, sure go ahead and buy some more in Orbit.
And then I received this:
My general practice is cost averaging at every 15% fall for 2 times from 1st Buy price; & if market
price rises by 10% from 1st Buy price, then invest remaining equal amount of money at this 10%
rise price.
But, as you clarified with present status of this stock, will wait for further worst-case downside
possibilities with this particular stock.
The take away as I would say it is learn to differentiate between speculative investments and
fundamentally sound investments. As for Orbit Corp I still believe that irrespective of all the
worries around promoter selling stake, bad real estate market and possibly some unconfirmed
reports of operators at play in the stock, it still makes a good speculative investment.

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[5] A Simple Rule to Calculate Fair Value of Stock

If you have been reading my posts or of any other fundamental stock analyst, you would have
noticed that typically focus on 2 areas of research qualitative & quantitative (i.e. financials).
Before I proceed, let me reiterate the importance of qualitative research i.e. that pertaining to
quality and integrity of management, state of the industry, and future prospects of the business
model.
Quantitative research deals with an analysis of financial data and accordingly the results are
somewhat predictable. All future predictions here rely on a certain level of guess work about future
growth, discount rates etc; most of which is based in part upon past growth. In other words, the
idea is to look at past growth levels and adjust future growth a few notches up or down based on
those levels.
Before you check the fair value of a stock on the basis below, keep in mind that:
1. Past performance is no indicator of future results Instead of using a standard growth
rate or discount rate for future (based on past rates or otherwise), the better way to
research is to anticipate future events and accordingly give growth predictions.
2. No full proof system There are many valuation techniques and those many
improvisations made by analysts in their efforts to predict the future better than others.
What you will find below is an easy to check the fair value of stock based on quantitative
aspects.
_______________________
Fair Value Calculation
For the purpose of this example, I will take 2 stocks for my base calculations
a)
Sunil Hi-tech Engineering we recommended this in our Multibagger portfolio on 18
November 2013 @ Rs 51 and exited from this stock on 2nd January 2014 @ Rs. 128; and
b)

National Steel & Agro Industries never recommended

Fair Value Based on Price Earnings (P/E) It is easy to calculate the price earnings ratio of any
stock by simply dividing its current price with its reported EPS of the last 4 quarters (take
consolidated EPS). The best way to assess the PE is by comparing it to industry PE and with the
historic PE of that specific stock.

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At the current price of Rs 138 (as on 9 September 2014), Sunil Hi-Techs trailing 12 month PE
comes to ~ 7.6 which is at a 15% discount to its 10 year average PE Multiple. It is another way of
saying that the fair value of this stock should be Rs. 162 and you are getting it at Rs. 138. This is far
below the industry PE (i.e. Power transmission and equipment; PE = 15).
At the current price of Rs. 24 (as on 9 September 2014), National Steel and Agros trailing 12 month
PE comes to ~ 3.27 which is slightly higher than its 10 year average PE Multiple. However, it is far
below the industry PE (i.e. Steel Sheets; PE = 20).
At these prices and based purely on PE analysis, Sunil Hi-Tech can be bought with a potential
15-25% year on year appreciation, with modest growth targets. For now, I would avoid buying
into National Steel on this basis, unless there are any other strong external reasons to buy into this
stock (which I may not be aware off).
Other factors affecting fair value of stock
That was a very basic (yet effective) way of arriving at some sort of fair value for a stock. There are
many factors which may affect the fair value calculation. Future plans of the company, the general
economic scenario, Industry specific news, are promoters buying or selling their holding?
To give you an example, MTNL stock has declined by nearly 90% over the last 6 years. With cellular
service providers (like Bharti Airtel, Vodafone and Reliance) gaining ground, was it justified to rely
on the past financial performance and the wide pan-India reach of MTNL 6 years back? Go back a
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decade and it may be harder to answer this. At that time it seemed unreal that someone would eat
into MTNLs market share so quickly.
Also, you must define for yourself the discount (in relation to fair value), at which you will be
happy to buy a stock. 20 30 40%, i.e. your margin of safety or your margin for going wrong.

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[6] Picking Value Stocks My Best Stock Purchase Decision

May be I have written so much about stocks which did not do well, asset classes (like Gold) which
are certain to destroy investor wealth and about other negative biases about investing that I have
started receiving mails like this:
Sir I follow your blog regularly but over the past few weeks you have written that gold should not be
in your holding, power and infrastructure stocks have high levels of debt and that we should stay away
from E-commerce companies in India. Can you tell any stocks we can buy? - Ganpathi
For a change I thought I will write about picking value stocks and talk about what I consider to be
one of my best stock purchase decision. We recommended this stock in February 2014. Today I am
making that recommendation public CLICK HERE TO ACCESS OUR STOCK OF THE MONTH FOR
FEBRUARY 2014, with full consent of the analyst who worked on it.
Investors who purchased this stock back then will understand why we said this (and I quote from
the report):
Strong Dividend Stock . . . . . . . . In future, once the Company becomes debt free, we believe that
dividends will increase substantially or that the company will accumulate ample cash piles to
invest in new ventures. . . . . .
The Company Noida Toll Bridge Company Limited. This had value written all over it. Perhaps
because I live in Delhi and use this bridge often that I was absolutely convinced that this bridge will
be a revenue generating machine for many years to come.
Why I Will Never Sell this Stock
For those who notice our track record page will see that we closed our call on Noida Toll Bridge on
the 10th of November 2014 after it generated a 75% capital appreciation in 10 months. In addition
the stock paid a dividend of Rs. 2.50 during the year. That takes the absolute return to over 87%.
Given that on my website, subscribers want to see returns in strict percentage terms, it was only
right to close this call.

That said; think about it, why will I ever sell this stock? I purchased 10,000 shares for
approximately Rs. 2,10,000/- I have so far received a tax free dividend of Rs. 25,000/-. That is a
dividend yield of 12%. Where else can I get tax free 12% p.a.? Further, this is hopefully not the end
of story. I am convinced that the company will pay higher dividends going forward, taking my
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dividend yield even higher. of course this is if I do not factor in a fixed rate of appreciation on my
capital.
Assuming that the company increases its dividend payouts by 0.50 ps per year. I will cover my Rs.
20.85 initial investment in approximately 4.5 years as tax free dividends. Whatever price the share
is trading at 4-5 years from now will just be a bonus for me. Personally, even at the current
dividend yield of 12%, I am happy to hold on to this forever.
About Picking Value Stocks: What Was Special About this Stock Back Then (and Indeed Now)
Noida toll bridge is a road construction company with one flagship project generating almost its
entire revenue the Delhi Noida Toll Bridge (DND Flyway). It commenced operations in the year
2001. 13 years on and the amount of traffic on the bridge has grown many times. This is despite the
Delhi Metro and alternate routes coming up during this time. I guess India is just getting more and
more crowded. The numbers of cars are increasing and the trend is likely to continue in future. All
roads are good roads. I would actually pay 3 times over the current toll to use a road which helps
me cut the Delhi traffic in the evening. Further, the steel and concrete bridge is in top shape and fit
to generate higher toll revenues going forward.
Factoring-in toll pilfering, alternate routes and everything else that can go wrong it still seemed like
a value stock. It sure seems like one today as well.
Second and the more important point, a first look at the financial statements of the company tells a
story. Look at how the company has reduced its debt over the past 10 years:
Noida Toll Bridge Company (Amount in Rs. Crore)
Year

2005

2006

2007

2008

2009

Debt

358.52

323.52

185.99

217.83

198.11

Year

2010

2011

2012

2013

2014

Debt

169.00

107.25

75.37

23.15

19.69

What do you expect the company to do with its toll collections once it pays of its entire debt which
it incurred in constructing the bridge? May be pay higher dividends or build another bridge? I am
happy with the higher dividends option which is why I purchased it in the first place. As for the
second, I am convinced that roads and highways have an ever growing market in India.Given the
amount of pollution in Delhi I wish this was not the case!
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[7] Why Value Investing Does Not Work Anymore

Over the last few months, I have received far too many mails expressing views on value investing
and stocks that are undervalued, often deeply undervalued in the opinion of the writers.
One of the best comments I received came from a 65 year old lady, who wrote this:
I have done a little research of my own and found that these days most of the shares are not only fully
valued but a good many of them over-valued.
I agree 100%.
In fact, I go further, if you find a stock that is not fully valued (or overvalued); think 100 times
before attributing any value to it, let alone stamping it as Undervalued. Most likely there is a
problem with the business. While the world of value investing bloggers will turn against me, let me
assure the readers that the only purpose which principles of value investing serve these days is to
help bloggers fool a large mass of retail investors.
It is easy to convince about the idea of value given that historically many investors became famous
following the value approach.
Let me take the 2 most basic principles of value investing

1. First, Stocks Being Undervalued, and;

2. Second, Margin of Safety
Sure. Stocks are and have always been undervalued and overvalued at different times. Again . . .
what exactly do these words mean?
Undervalued in relation to what? The price?
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Ok so the value is higher (or far higher) in relation to the price. Now you know the price but not
the value, as they say.
Lets play AMAZE A game about arriving at a (pre-set) value figure, mathematically!
Here is an explanatory chat with Mr Valuation for the year 2015:
Question

Mr valuation

How exactly will you arrive at the value?

Oh, I will do the whole PE / DCF / PV etc. etc.

model, multiply numbers with a potential
growth factor and BAMM! I will give you Rs. 440,
on an excel baby!

Arent these PE / DCF / PV exactly what Ahh. Because they are using different growth
everyone else out there is doing? Why are they factors. None other than me are correct though
arriving at different values?
unless of course they managed to arrive at the
same result.
But growth factor is always an assumption so Hmmm.
it really is that they differ in their future
forecasts.
Anyways, werent we talking about value? So
this stock should be Rs. 440 as per you while
it is at Rs. 290 in the market. So there is value
as per you because you assumed a higher
growth factor than others.

No silly, I assume a growth factor based on past

performance. If the company achieves similar
growth in future what should then the price be
in 5 years. Then I discount that price back to
todays value to see if the stock is overvalued or
undervalued. Further, I check how much is it
undervalued by 10 20 30 %. I call
this margin of safety.

Hmm. (looks up slightly towards the roof)

(Smiles and politely asks) You understand?

You Idiot if all of you all are doing the same Hmm. (looks up slightly towards the roof)
thing, what is left to be discovered other than
your own assumptions of growth?

Value Investing Keeping Everybody Busy

You or some other analyst like you has basically covered all companies using electronic calculators
given it anywhere between 10% to 50% future growth multiple used a discount rate to

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discounted things back to arrive at a present value and is now convincing the world about the
accuracy of his math. This goes on 365 days a year, holidays included.
Further, let me agree with this approach as The Value Approach, (though I mark my protest
against this). While I do agree that the difference between growth and value investing is fading by
the day, isnt it growth that you were really looking for with all those future multiples?
Focus On Value But Look for What Really Matters
Trust me, you (or your money manager) are not the only geniuses who saw that a share is trading
below its historic growth multiples. I did too, so did Prakash, Arjun and Mansi. Be careful . . . we did
not buy it because there was something terribly wrong with the business. Forget value, in our view
this business may not exist in 5 years from now.
For Warren Buffet and a host of other investors, the principles of value worked. In that era, news
did not flow as smoothly as it does today, there was no internet and financial statements took a
while to reach the investors. Investors and money managers had to seek time to meet corporate
management and if one got lucky, he would read about a money managers interaction with an
unheard of company, in some equally unheard off magazine. Those who had the courage to rely on
such magazine transcripts would dwell further in their value hunt.
Things are somewhat different today. Take any company even something that got de-listed in
2007 search for its valuation or fair value price on Google, let me know if not many analysts are
covering it, Ill look into it for you (get the point!).
Last Word
My idea of writing this piece was not to undermine the principles of value if you find a big margin
of safety, well done. If you feel something is trading below its historic valuations, well done again.
But mostly, you should be looking for something that will trade much higher in future not because
of its historic multiples but because of how much they are likely to improve in future. ITS CALLED
GROWTH.
For all that its worth you may do a quick math on a stocks past and future value based on
whatever pleases you call it value and move on. Its not a bad thing to do.
__________________________________________________________
About MAGNIFICENT 7
Based on the above principles I have come up with SEVEN (7) stocks which I believe will do well
over 3-5 year time horizon. To make it fancy I am going to call it Magnificent 7.
This portfolio of stocks is available on this page Magnificent 7 (member zone). Follow the
percentage allocations for each stock for a balanced portfolio. Also note that this is not a quick rich
Multibagger stock portfolio. For that you should visit the multi-bagger page of the website
VISIT HERE TO POST A COMMENT ON THIS ARTICLE
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[8] How to Select the Best Stock to Buy

As an investor you may face the dilemma of selecting 1 out of 2 or 3 (or even more) stocks. This
typically happens when an investor already has a diversified stock portfolio and does not want to
add more than 1 new stock. While it may be tempting to add equal quantity of all 3 stocks, although
over diversification reduces risk, also diminishes the potential reward. This is where the investor
must select the best stock to buy out of a list of potentially rewarding stocks a further filtering
down to avoid over diversification.
The job is easy when you have to select from amongst stocks operating in the same industry /
sector. In my previous posts I have explained how to do that. To make it more interesting in this
write-up I will do the following:
1. Instead of taking stocks from the same industry take 3 stocks operating in different industries.
2. 2 of these stocks have been making losses and hence it is not possible to come with their price
/ earnings ratio.
3. I will assume that I have to select 1 out of these 3 stocks to include in my portfolio as
a multibagger stock pick i.e. a high risk high reward pick:
Company

Industry / Sector

Anant Raj Limited

Construction

Unity Infraprojects

Construction and contracting

McNally Bharat Engineering

Engineering (turnkey services)

The key to long term equity analysis is research on both qualitative and quantitative aspects. You
should break down the companies on the basis of management quality, business plans, future
markets as also on the basis of their financial metrics. There is no science when it comes to factors
which are more important than others. In general I always give higher importance to management
quality, future potential and future plans of the company, i.e. Qualitative aspect.
Quantitative Aspects Valuation (see more ratio analysis in foot notes)
When it comes to valuation, there are 2 equally popular methods which analysts use to determine if
the stock is under/over-valued the Price Earnings (PE) method and the cash flow or the
discounting of cash flow method.
The price earnings method is the easier of the two and is readily applicable to any company unlike
the cash flow method which is harder to apply to companies operating with high levels of debt and
where revenue stream will start at a future stage.

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Fair Value Based on Price Earnings (P/E) The most helpful method to check if a stock is fairly
valued is by comparing its current PE with its historic average.It is easy to calculate the price
earnings ratio of any stock by simply dividing its current price with its reported EPS of the last 4
quarters (take consolidated EPS). In the tables below I have calculated the 10 year average PE for
all three companies.
Anant Raj

Average P/E = 17.48

2005

2006

2007

2008

2009

Price

3.16

138.70

220.69

228.60

40.20

EPS

0.15

12.89

5.25

14.81

7.03

P/E

21.07

10.76

42.04

15.44

5.72

2010

2011

2012

2013

2014

Price

132.70

83.30

58.50

63.05

57.00

EPS

8.07

5.69

3.84

3.65

3.51

P/E

16.44

14.64

15.23

17.27

16.24

McNally Bharat

Average P/E = 17.98

2005

2006

2007

2008

2009

Price

57.10

139.70

135.05

172.00

38.85

EPS

1.66

2.02

6.28

7.83

15.76

P/E

34.40

69.16

21.50

21.97

2.47

2010

2011

2012

2013

2014

293.50

218.50

87.15

68.40

68.30

Price

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EPS

18.22

21.64

21.31

(7.06)

(24.51)

P/E

16.11

10.10

4.09

Unity Infraprojects

Average P/E = 5.64

2005

2006

2007

2008

2009

Price

94.34

94.34

87.99

106.71

15.46

EPS

12.13

23.17

31.67

44.93

52.61

P/E

7.78

4.07

2.78

2.38

0.29

2010

2011

2012

2013

2014

Price

120.20

63.60

48.60

26.65

22.50

EPS

57.79

12.96

14.37

13.98

0.84

P/E

2.08

4.91

3.38

1.91

26.79

At the current price of Rs. 38 (as on 30 March 2015), Anant Rajs trailing 12 month PE comes to 7.6
which is at a 56.5% discount to its 10 year average PE Multiple (i.e. the fair value of this stock
should be Rs. 87.7 and you are getting it at Rs. 38).
To explain further I took the last 4 quarters EPS (you can get that on this page look for valuation
analysis quarterly). I divided the current price of Rs. 38 with this EPS to arrive at the current PE of
7.6. This is at a discount to the 10 year PE. Fair value of the stock @87.7 is arrived at by multiplying
the 10 year PE of 17.48 with the EPS of the last 4 quarters which is 5.02.
How do you calculate Price to Earnings (PE Ratio) when EPS is negative?
PE method cannot be applied to companies which report losses in previous years. This is because
negative earnings as the denominator of PE will yield negative result.
One way of overcoming this problem is to take estimated future earnings for a year in which you
believe the earnings will turn positive. The current market price of the share can then be divided by
its expected EPS at a future date. This is called the Forward PE Multiple. This naturally will
involve some bit of estimation.
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Another way of doing this when you are comparing 2 or more companies on the basis of PE
multiple is by using the reciprocal of PE the EPS/Price ratio. To explain this in our example:
Mc Nally Bharats trailing 12 month EPS comes to (20.09), and its current price is Rs. 81 (as on 30
March 2015). Its EPS/Price = (0.25)
Unity Infras trailing 12 month EPS comes to (16.77), and its current price is Rs. 16.85 (as on 30
March 2015). Its EPS/Price = (0.99)
For the sake of comparison, the EPS/Price ratio of Anant Raj = 5.02/38 = 0.13
Now just rank the 3 companies on the basis of EPS/ Price ratio. 0.13 (0.25) (0.99).What we just
did was rank the companies on the basis of earnings performance best to worst.
To understand the calculation better for companies with positive EPS, I recommend that you
see this post on how to calculate the fair value of a stock based on the price earnings
method.
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[9] Nifty PE Ratio as an Indicator of Stock Market Valuation

The Nifty Price/ Earnings Ratio or the Nifty PE ratio is almost certainly the best buy / sell indicator
for anyone who believes in buying good companies at cheap valuations. The way to calculate the
Nifty PE Ratio is not any different from how the PE Ratio of a stock is calculated.
Nifty PE Ratio
Nifty PE ratio is calculated by dividing the sum of market capitalization by the sum of
earnings of all companies which constitute the S&P CNX Nifty. The important thing to keep in mind
is to work with consolidated earnings uniformly for all companies. Financial websites (even the
most popular ones) often report erroneous PE multiple both for a stock and for the index as a
whole. For more on this see towards the end of this article: Index wide PE calculation Sensex
and Nifty PE.
You do not have to put much effort in calculating the Nifty PE Ratio. NSEs website has a tool
which calculates PE and other basic ratios across Indices (click here).
What the Nifty PE Ratio Indicates
Naturally the ratio is a measure of how expensive the overall markets are at any given point of time.
On the whole this ratio serves as a great indicator especially when you compare it against the
average number for the last 10 15 20 or so years.

At 23.51, the Nifty PE is almost close to its 15 year peak level (as on 10 April 2015).

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Keep in mind that this ratio is based on two variable (a) price of the stock; and (b) earnings.
Whenever price moves faster in relation to earnings, the PE number will go up. Over the past 8-12
months Indian stock markets have witnessed what can best be described as a rally of hope. While
stock prices have become expensive with the markets rallying over 25 %, the underlying earnings
have not improved. In fact they are yet to be reported for a full year.
Having witnessed such performance in the absence of any proof of fundamental improvement, one
might ask: what then has been driving the markets? Even if the governments schemes, proposals
and future plans all yield the desired results, it should take at least a few years before earnings start
improving on that basis.
But again, like a wolf behind the rabbit, optimism is always many leaps ahead of reality. How long
will such situation continue is anybodys guess. While one might argue that nothing suggests a
crash right now; the truth is that nothing ever suggests a crash other than hindsight.
My View on the Overall Nifty Valuation
I believe that over the next 4-8 quarters the markets will go up and down in 10-15 % range i.e.
25,000 30,000 range. If I must, I will speculate with some downside bias. I do however believe
that eventually the earning cycle will improve which is when the markets should break out in a
meaningful way.
Also Read: Relationship between stock prices and the real economy
What is a Good Investment Strategy Right Now?
In past I have written much about high commission and expense charges which you end up paying
when you invest via mutual funds. As someone who invests in equities directly, I may have a bias on
this subject. Having said that, I have always maintained that for a majority of individuals it is far
more sensible to invest in mutual funds than to try and invest on their own. I say this not because
such funds are managed by specialist investment managers but more because they follow money
markets far more closely and hence are able to move money between asset classes faster and more
effectively.
To give you an example, a few days back I met my friend Navneet who is an Associate Directors
with IDFC Asset Management Company. We discussed our short and long term views on the market.
I shared my above view with him.
In return what he shared with me was an interesting study they did. Look at the image below:

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Maximum money flows into mutual funds when Nifty is in the red zone i.e. when Nifty PE multiple is in
the 19-25 zone expensive markets. Fewer people invest when the multiple is in the 10-15 range
cheap markets.
To deal with this anomaly of human behavior some funds maintain the ability to move money inand-out of equity as per the market valuation. At any given point such funds have anywhere
between 30% 100% exposure to equities. More expensive the market, lesser allocation they make
to equities thereby increasing their exposure to other asset classes like fixed income and debt
products.

This ability to effectively switch between equity and other asset classes make mutual funds
attractive for anyone who can not devote enough time to investment research.
IMPORTANT NOTE
Each mutual fund scheme is different in terms of its strategy, objective and asset allocation. It is
important that you understand the product carefully before allocating money to it. The above

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example does not explain how mutual funds operate in general and is very specific to the strategy
followed by one particular fund.
Whether you decide in favor or against buying mutual funds, the probability of success depends
largely on your understanding of the product and more importantly on understanding your own
personal goals and risk profile. Discuss these aspects carefully with a neutral investment adviser
before investing.
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[10] How to Prepare For the Next Stock Market Crash?

One year ago I did a detailed research on Sensex target for the year 2020 (full article here). In
that research, I studied the growth of the Sensex over the last 24 years and analyzed where we
could end up in the year 2020. At that time, the Price Earnings multiple for the Sensex as a whole
was ~ 17.6 (as compared to 19.7 today- 8th April 2015). The average multiple for the past 10 years
being ~19.35.
Based on different growth projections, I came up with two targets
42,540 (moderate) | 54,286 (rational).
When the above research was done, the Sensex was trading between 21,000-22,000 points.
Needless to say that it was an extremely dull time for the markets and for asset managers. Not many
people were investing in stocks. It was also a better time to buy stocks with markets trading ~ 25%
below their current levels.
In the above post I correctly predicted the beginning of a bull market. In this post I am
predicting nothing. I will talk about a stock market crash in general. I do however predict
that eventually a stock market crash will happen. At the same time, I maintain my 2020
target for the market.

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What was common in all of the stock market crashes above?

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In none of the years above asset managers, economists or market experts could predict the
approaching stock market crash. On the contrary most were predicting higher targets for indices
world over. While there were the occasional doomsday academics; their number was no greater
than it is at any other time.
The ones who foretold the crash in the months or weeks immediately preceding it were admired for
their insight and went on to sign book contracts. I guess they got their timing right!
From recession to revival to the next inflection point, an economic cycle follows the same
path each time and yet there are no rules when it comes to economic forecasting. That said, even
with such lack of clarity there are things which you should keep in mind at all times to protect
yourself from a stock market crash.
[1] You never know when it hits you again
The phrase double-dip recession was mentioned 10.8 million times in 2010 and 2011 according to
Google. It never came. There were virtually no mentions of financial collapse in 2006 and 2007. It did
come.
I have been working in capital markets for over 10 years. In 2008 I told myself that next time I will
look out for a crash. My colleague at that time even figured a method:
Anytime the market crashes by over 35%, it will rise by at least 20% within a week from the session in
which it breached the 35% mark.
You can make any such rule but the next crash will be nothing like the last one. There will be
absolutely no indication the next time either so dont expect to receive a pre-recession
announcement on CNBC.
[2] Its near its peak when your grocer starts buying stocks
I started my firm in the year 2011. Here is a look back at the biggest challenges I faced over the
years and my prediction for the future:
2011-2012 Pessimism
During these years my biggest challenge was to convince people about the benefits of investing in
stocks. If ever I got someones attention for longer than a few minutes it was mostly because they
wanted to learn what happened in 2008 and why people always lose money in stocks.
2013-2014 Growing Skepticism
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During these 2 years I became a full time finance writer, conducted lectures and met people most of
whom wanted to discuss fixed deposits and safe mutual fund options.
2014-2015 Optimism
For the last about 6-10 months I have noticed that people are far more willing to talk to me than
they were ~ 3 years back. Equity investments seem to be making sense for many if not all. The line
of questioning has changed to stocks that will grow 15-20% on year on year basis.
My Prediction for beyond 2018 Euphoria
Investors will start making money on anything they buy. Thats what happens in hyper-bull
markets. You can buy anything and it will trade higher the next day. Once again it will be hard for
me to get the attention of people for longer than a few minutes.
Just before the crash of 2008, everyone was buying stocks. The banker, the lawyer, the doctor . . . .
even the grocer was investing in the market. Watch out for when this happens again!
[3] Those who look stupid at first are often the ones who succeed
You dont have to catch the bottom, nor the peak. If you can manage to buy anytime after a
substantial correction, you will be very rich. Over time stocks make new highs, I dont think it
should be difficult to start. What are you waiting for? Equally important is to sell when things stop
making sense. No matter how much the market rallies after you sell, do not buy again.
In this regard, the hardest thing to do is to stick to your decisions. This becomes particularly true
when at first your decision appears unintelligent. The longer you look stupid the tougher it is to
stay firm with your decision. Some of my stock purchase decisions which I made in 201112 hardly delivered returns higher than a bank deposit for the initial years. In the last 4 years not
only have I earned back my investment amount as dividends but the value of my principal has also
appreciated.
I will tell you something which works 100% times If you manage to stay invested for long enough
. . . . . you will make a lot of money. Period. There may be those who make more money than you and
those who lose far greater, you however will do wonderfully.
Remember what the main prodigy tells the fastest of all his horses in the film Ben Hur You dont
have to win first, you have to win last. If you have not seen Ben Hur, thats what you should be
doing this weekend.

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[4] Keep calm and hold many assets

I could write a book on diversification. Not so much because I am risk averse but because I am not a
big fan of it.
Unfortunately the nature of stock markets is such that you can never predict when things get out of
hand (look at point 1 above). There will be 7-10 recessions over the next 50 years. Dont act
surprised when they come!
The only way you can really prepare yourself for a stock market crash is by keeping some of your
money in other asset classes.Everybody has biases. There is nothing wrong with that. I have a bias
against gold so any investment other than stocks goes into safer money market products.
I have always believed in the 100 minus your age rule (read here) when it comes to equity
investments. Besides equities I like to own fixed income products.
Also Read: Best fixed income investment options in India.
The important thing is to hold on to other assets so you can fall back on them in times of need.
Think of these assets as an insurance policy which you will use when all else fails.
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Art of Investing | Full Module

Take this Course for ` 3,449

Economic & Industry Analysis

Pages from History Imagining Money

Article

Pages from History Fast forward to the reign of The U.S. Dollar

Article

Gold vs. the US Dollar

Article

Intro - Top down Approach vs. Bottom up Approach analyze Market PE 10 Years

Key Economic indicators

Article

How the Central Bank (RBI) keeps a check on money supply

Article

Basics: Foreign exchange markets and Currency Rates

Article

Stock Market vs. Economy: Is there a relation at all?

Article

Article + Video

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Article

Industry cycles and how do you find booming industries?

FMCG Industry Outlook

PowerPoint

Automobile Industry Outlook

PowerPoint

Porters Five Force Analysis

Examples* of Industry Leaders :

Article

- ITC Limited: A well diversified cigarette company?

- Future Prospect of Indian Oral Care Industry

Article
Article

How to use the BCG Matrix to make better investment decisions?

Article

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Company Analysis

Fundamental Analysis | what is Investment? | Short term vs. Long term | When to stay

Article + Video

away from markets? | Swing trading.

How efficient is the efficient Market Hypothesis?

Article

Investors Edge: What puts them ahead of the curve?

Article

Starting your Research

Article + Video

How to find value: Intrinsic value vs. book value

Start with the As: A simple approach to finding investment grade stocks

Article

About the Company

Article

How to assess management integrity & competence?

Article

40 | P a g e

Ratio Analysis & Valuation

Profitability Analysis
- Operating Profit Margin Ratio
- Net Profit Margin Ratio

Efficiency Ratios
- Return on Capital Employed (ROCE)
- Return on Equity (ROE)

Liquidity and Credit Ratios

- Current Ratio
- Long Term Debt to Equity Ratio
- Interest Coverage Ratio

Valuations: A closer look at the P/E Ratio

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PowerPoint
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PowerPoint
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PowerPoint
PowerPoint
PowerPoint
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Quantitative Analysis : Key things to keep in mind when using financial ratios

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The Concept of Discounted Cash Flow Analysis

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DCF Calculator

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Dividend Investing

Dividend Investing : Greatest Story Ever Told

Make Sure to Claim Your Dividends

Article + Growth EV +
Dividend Experiment Excel
Article + Growth EV +
ITC Dividend Growth Sheet

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Selecting Stocks for Dividend Investing

Further Reading

What you must know about Mutual Funds

Relevance of Economic Moats in Stock Investing

Importance of Brand : Why brands are more important today than anytime in past

Article
Article
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100 years

42 | P a g e

Option Strategies
Note:
1. All Strategies are illustrated with live market quotes of the underlying stock/index.
2. Option Payoff Calculator is included to help you calculate premium, profit, loss and break-even for each strategy presented below.
Disclaimer:
The information, calculators and other tools presented below are provided to you for educational purposes only. This material is not to be relied upon in
substitution for the exercise of independent judgement. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that
any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. Sana
Securities does not advise on the tax consequences of investments and you are advised to contact an independent tax advisor.

Introduction to Derivative Market

Article

Basic Call Options - Long

Article

Basic Call Options - Short

Article

Basic Put Options - Long

Article

Basic Put Options - Short

Article

Short Straddle

Article

Long Straddle

Article

Short Strangle

Article

Long Strangle

Article

Long Call Butterfly Spread Strategy

Article

Short Call Butterfly Spread Strategy

Article
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Synthetic Long Call Strategy

Article

Covered Call Strategy

Article

Long Combo Strategy

Article

Collar Strategy

Article

Bull Call Spread Strategy

Article

Bull Put Spread Strategy

Article

Bear Call Spread Strategy

Article

Bear Put Spread Strategy

Article

Long Call Condor Strategy

Article

Short Call Condor Strategy

Article

Long Call Ladder Strategy

Article

Long Put Ladder Strategy

Article

Short Call Ladder Strategy

Article

Short Put Ladder Strategy

Article

Strap Option Strategy

Article

Strip Option Strategy

Article

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